Faint Cheers for Europe's Recovery

By Frederick Painton

For the past three years, Western Europe has been the slowpoke of the world economy, lagging well behind the U.S. and Asia. Now Europe is achieving the kind of steady growth that demonstrates a welcome, if belated, capacity to respond to international competition. During the past twelve months, Europe has pushed ahead at close to an average 3% annual rate, while the U.S. has expanded at only 2%. The European upswing, moreover, is expected to last another twelve months or so, fueled by a backlog in export orders, healthy profits in many industries and a rise in consumer spending.

All that good news, however, is prompting only faint cheers from Europeans. Reason: it is a strange, jobless prosperity that so far has made no significant dent in Europe's record 19 million unemployed. It is also a lopsided recovery, still heavily dependent on exports, especially to the U.S., and therefore relying on a strong dollar and good American growth.

That was the bittersweet assessment of TIME's European Board of Economists at its meeting in the Swiss banking center of Zurich. Hans Mast, a University of Zurich lecturer and executive vice president of Credit Suisse, pointed to Western Europe's estimated trade surplus of $25 billion this year, compared with $10 billion a year ago, as evidence that an export boom is propelling most of the growth. Western Europe this year is expected to have a surplus of $30 billion in trade with the U.S.

The trade situation, though, could be affected by instability in foreign exchange markets and shifting currency values. A readjustment of currencies within the European Monetary System, which is made up of Belgium, Denmark, France, Ireland, Italy, Luxembourg, the Netherlands and West Germany, took place last weekend. The Italian lira was devalued by 6%, while other currencies were revalued 2%. The Italian currency came under heavy speculative pressure on Friday, with its value going from 1,870 lire to the dollar to 2,200 in a few hours before the Bank of Italy stepped in and ordered a halt to trading.

Plenty of good economic statistics can be seen in Europe. A decline in overall interest rates and rising profits have brought an increase in industrial investment, notably in West Germany and, to a lesser extent, France. Inflation is hovering around 4.5% annually in most European countries, a major improvement over the 10% or more rates of just three years ago. The news on unemployment, though, is much less encouraging. The TIME board foresaw over the next year a decrease in the jobless rate from the present 11% of the work force to only 10.8%.

Assuming that the U.S. economy remains on course, the board gave encouraging forecasts for the European Community's major economies and Scandinavia:

WEST GERMANY. For Herbert Giersch, the economy looks "quite satisfactory," especially when compared with the recession year of 1982, when the conservative government of Chancellor Helmut Kohl came to power. Growth this year is loping along at about 2.5% and should reach 3% in 1986. That's a considerable improvement over three years ago, when GNP declined 1%. Inflation is down in the same period, from 4.6% to 2%.

The upswing, however, has its darker side, Giersch notes. West Germany currently depends on exports for almost all its growth. Agriculture, construction and even domestic car sales are still weak. Above all, the 9% unemployment rate shows no signs of declining, despite government measures to encourage temporary foreign workers to return home, early-retirement schemes and vocational-training programs. For Giersch, the root cause of the problem is an excessively rigid labor system that discourages workers from accepting job or salary changes. Proposals to alter this situation, he adds, meet resistance from both unions and government. Said Giersch: "Flexibility is polemically denounced as Americanization or a return to 19th century capitalism with the ugly face of exploitation."

FRANCE. Jean-Marie Chevalier sees no safe way to improve much on his country's present, relatively slow 1.1% annual growth rate. Like Giersch, he believes the remedy lies in reforms aimed at bringing about more flexibility in wages, more incentives for entrepreneurs and more worker retraining. Chevalier was encouraged by his government's gradual progress in ending France's trade deficit and reducing its budget deficit. The cost of servicing the nation's foreign debt has stopped an upward climb, although it now stands at $11 billion a year. Proctivity in 1984 rose by a strong 5%. Industrial investment is good, partly in response to higher corporate profits. Inflation has dropped to 5.7% annually this year, and is expected to decline to 5.2% in 1986. Even with that improvement, France's inflation is still about three percentage points higher than that of its major trading partner, West Germany.

French unemployment, which affects 10% of the work force, is a greater problem than West Germany's, according to Chevalier, because the percentage of jobless youth is significantly higher. He forecasts that unemployment will increase to 11% next year. That is bad news for President Franc,ois Mitterrand's government, which faces a national election in 1986.

BRITAIN. Despite relatively high interest rates, the British economy is showing some symptoms of a boom, according to Samuel Brittan. Not counting North Sea oil operations, profits have nearly doubled in the past four years. That is due in part to increased investment. The British economist foresees growth this year reaching 3.5%, but attributes a full percent of it to a temporary boost from the ending of the miners' strike. He expects the expansion to taper off to 2.25% next year. Brittan noted that the slowdown in the U.S. has not seriously affected West European growth so far because it has limited American output but not demand for products supplied by the rest of the world.

ITALY. Guido Carli, who was not present in Zurich but sent his analysis earlier, found that signs of greater political stability in his country are outweighed by the government's failure to move forcefully against a staggering budget deficit. At 13% of GNP, it is the largest of any of the major industrialized nations. The deficit currently is racing some 30% ahead of last year's figures, Carli reported, while the trade deficit in 1985 will probably be $5.8 billion, double last year's rate. Under pressure from these deficits, the money supply is expanding above the official targets, and inflation, forecast to reach 8.7% by year's end, is two percentage points ahead of the government's goal. To achieve the official fiscal targets, the budget deficit will have to be cut by about 10% in the second half of the year. Asked Carli: "Is this feasible? I doubt it."

This situation presents the Italian government with a dilemma. The obvious anti-inflation weapon is higher interest rates. Yet more costly credit would slow down investment and the much needed modernization of Italian industry. Investment has boosted productivity and thus helped provide the basis for this year's 2.1% growth forecast.

SCANDINAVIA. Of the four northern countries, Nils Lundgren reports, two are doing well: Finland and Norway. The Norwegians are benefiting from the earnings on North Sea oil. Finland's 2% annual growth this year, half a percentage point above the average for Scandinavia, is the result of a government policy that limited the state's role in the economy, held down public spending and encouraged the growth of highly competitive export industries.

Sweden and Denmark, on the other hand, are still grappling with problems generated by a period of overly rapid government spending, leading to huge budget deficits, which amount to about 3% of GNP in both countries. Government outlays have helped Sweden hold unemployment to 3.7%, but the public debt is rising swiftly and now stands at more than 20% of GNP. Denmark, like the rest of Western Europe, resignedly accepts unemployment of around 9%.

Throughout the session, the board members returned to Europe's baffling unemployment dilemma. There was general agreement that joblessness, especially among the youth, posed a latent political problem, but earlier concerns of great social unrest have proved unfounded. In the longer run, Herbert Giersch and Jean-Marie Chevalier fear, young people alienated from the socioeconomic system might become easy recruits for some political extremist leader. In addition, board members deplored evidence that Europe was becoming resigned to unemployment, accepting a society divided between those with jobs and those without. Lundgren called this "a permanent lumpen proletariat."

In the end, said Hans Mast, the answer may lie with demographics. The European baby boom of the 1950s and '60s was followed by a baby bust in the early '70s. This means fewer young people will be searching for jobs at the end of the decade. All well and good, but what can Europe do for the millions currently unemployed, many of whom have never held a steady job? There is a real danger that they will become Europe's new lost generation. --By Frederick Painton